Asset risk is the risk attached to assets like stocks, bonds, or currency, and it is incurred by investors because one or more of these assets might perform poorly. As such, this risk is also commonly known as investment risk. The goal of all investment strategies is to minimize asset risk as much as possible while still providing for potential profit. Investors may minimize their risk by diversifying their portfolio, putting stops in their investment orders to lessen the impact of poorly performing securities, and closely analyzing their investment choices.
Many people look at the stock market and other investment opportunities as ways in which they can get rich from a small commitment of capital. While that is the case on rare occasions, investment reality often entails people losing money just as quickly as they can gain it. Any time that an investor puts his money behind some sort of financial asset, he must realize that there is always asset risk that goes with it.
As an example of asset risk, imagine that an investor buys 100 shares of a particular stock for $1,000 US Dollars (USD). Ideally, the shares of that stock will go up in price, thereby raising the value of the shares, which would garner a tidy profit for the investor. The underlying company offering the shares might struggle or even, in a worst-case scenario, go under, in which case the $1,000 USD originally invested could simply disappear. That is the type of risk that goes along with any investment scenario.
Luckily, there are ways that an investor can manage the asset risk he might incur. One way is to only choose securities, like government bonds, that carry minimal risk. The trade-off for the investor is that such securities generally return very little in the way of profit. For this reason, an investor should try to have a portfolio that is well diversified, meaning that she balances out some of her riskier securities with safer ones to lessen the total risk without eliminating profit potential.
In terms of the stock market, investors can mitigate asset risk by putting limits on the amount they're willing to lose on a particular security. These limits, known as stops, require a broker to sell off under-performing securities when they fall below a certain level, thus lessening the damage these poor performers can do. Perhaps the best way that an investor can keep risk away is to do the maximum possible research on his possible investments, as opposed to just haphazardly tossing money from one security to the next.
